Trade credit insurance can provide numerous benefits to help companies finance their working capital. While these benefits are specific to every client, below is a scenario to help illustrate the positive impact trade credit insurance can have on a borrower’s credit availability. Scenario - Insuring Domestic Receivables
In today’s lending environment, it is common to be able to borrow against domestic receivables that are due and payable within 90 days. These type of credit facilities, usually borrowing base structured, have general exclusions such as foreign receivables, past due receivables, concentration limitations, etc. Once these restrictions are accounted for, the lender will generally advance 70% - 80% on the receivables deemed eligible.
Below is an example of a typical borrowing base. The ineligible receivables in this scenario are made up of past due accounts, receivables with payment terms greater than 90 days, inter-company receivables and customer concentrations.
Without Insurance
Gross Domestic Accounts Receivable $7,000,000.00
Less: Ineligible Accounts Receivable $2,100,000.00
Net Eligible Domestic Accounts Receivable $4,900,000.00
Maximum Advance on Eligible Domestic A/R (75%) $3,675,000.00
Now, let’s look at the same borrowing base, however, in this scenario, the receivables are insured. By using insurance, lenders will often advance up to 90% on eligible receivables and will include previously ineligible items such as receivables with longer payment terms as well as concentrations. As shown in the below example, eligible collateral increased by $1.2 million and availability increased by over $1.8 million.
With Insurance
Gross Domestic Accounts Receivable $7,000,000.00
Less: Ineligible Accounts Receivable $900,000.00
Net Eligible Domestic Accounts Receivable $6,100,000.00
Maximum Advance on Eligible Domestic A/R (90%) $5,490,000.00
Conclusion: Trade credit insurance is often an overlooked tool to help improve funding for domestic accounts receivable. By insuring domestic accounts receivable, companies are able to reduce the risk of non-payment on their accounts receivable, which is often the largest asset on their balance sheet, and at the same time increase their funding capability to finance their working capital need.
About Impello Global
Impello Global is a trade finance advisory boutique and specialty trade credit and political risk insurance brokerage, headquartered in Seattle, Washington. We specialize in brokering trade credit and political risk insurance and also provide advisory services to companies and lenders who are looking to expand their global trade capabilities. Please visit our website at www.impelloglobal.com or contact us directly at info@impelloglobal.com.